Canadian Dollar: Caution Warranted

Calafia Beach Pundit submits: The Canadian dollar has reached parity with the US once again. There's a lot going for it these days, and it shows, since the loonie is about as strong relative to the US dollar as it's ever been. That's the message of the first chart, which compares the spot price of the loonie (blue line) to my calculation of its purchasing power parity (green line). The gap between the two is pretty large, which suggests a significant "overvaluation" of the loonie. The loonie has lots of fans because it is a "commodity currency" as the second chart shows. The loonie has traditionally been highly correlated to commodity prices, since Canada is a major producer of commodities. Commodity prices have been on a tear for over a year, and so has the loonie. Canada as a whole also looks pretty good relative to the US of late, since the country has largely avoided the banking crisis that the US is struggling with. (See this post which explains why: the Canadian government has for the most part avoided meddling in the housing and mortgage market.)Complete Story »

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For Teck Resources Ltd. Chief Executive Donald Lindsay, every cent knocked off the value of the Canadian dollar is worth $62 million.
As Chinese economic growth slows, that’s been a rare bit of good news for the world’s second-largest seaborne exporter of coal used in steelmaking, which was forced to take a $30 million writedown on its inventory in the first quarter as the commodity’s price plunged to its lowest level in six years.

Calafia Beach Pundit submits:
Things are looking much better in Canada than in the U.S. Once again, the Canadian dollar has reached its highest level ever against the U.S. dollar, both on a nominal and inflation-adjusted basis. This chart compares the Can$ exchange rate vs. the U.S. with my estimation of Purchasing Power Parity, which is the exchange rate at which prices would be roughly equivalent in both countries.

Canada’s dollar is missing out on the world-beating gains of its commodity-linked peers amid shrinking demand from the U.S., its biggest export market.
The loonie has tumbled 4.8% this year against a basket of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes, the worst performance in the group. Canada’s currency is struggling even as the dollars of Australia, an iron-ore producer, and New Zealand, which relies on dairy exports, led the pack with gains of more than 3%.

OTTAWA — Canadian housing prices were still about 10% overvalued at the end of 2012, the IMF said on Thursday, and it warned that authorities may have to intervene a fifth time in the mortgage market if personal debt levels rise further.
The International Monetary Fund, in its annual report on Canada, also said the country’s currency was between 5 and 15% higher than warranted by long-term economic fundamentals, lifted in part by commodity prices and the country’s safe-haven status for investors.

OTTAWA — Nothing falls quite as quickly as a loonie caught in the cross hairs.
The Canadian dollar has been a target of debate, and much angst, since it was last above parity with the U.S. currency 11 months ago. Ever since, the Bank of Canada has been under the gun to bring it even closer to Earth to help fire up the economy.
Of course, the central bank has no such mandate — officially. Only talk can cheapen our dollar, short of direct intervention in extraordinary times.

The recent crash in oil prices has set the stage for the most-anticipated OPEC meeting in years on Thursday. As oil-producing powerbrokers prepare to gather in Vienna, the Financial Post and Calgary Herald this week present Oil Pressure, a look at the forces buffeting, and buffeted by, the new oil world order. Today, the ties that bind Canada’s economic fate to energy prices.

John Curran’s phone is ringing a lot these days. He’s the senior vice-president of Canadian Forex, which specializes in currency exchange. In other words, his company tries to get you a better rate.
Canadians still looking to buy a vacation property in the United States have to look harder for deals today so saving money on exchange rates is more enticing than ever. Recovering prices and a weaker loonie have eaten into bargains south of the border.

The Canadian dollar wallowed at four-year lows early on Thursday after the Bank of Canada all but begged the market to sell the currency, while sterling took off as investors priced in an earlier start to rate hikes in the UK.
The loonie was trading at 89.68 US cents at 7 a.m. Thursday, bringing its decline this year to 4%. It fell nearly 7% for the whole of 2013.
“The Bank appears to have few qualms about tossing the “strong” loonie under the bus to achieve its inflation target, said Sal Guatieri, with BMO Capital Markets.

Marc Chandler submits:
The US dollar is mostly higher. The sell-off in equities and commodities is seen as dollar positive because it is seen as the funding currency. I am not persuaded that risk-on/risk-off is the best characterization of what is happening, because the correlation between currencies and commodities and equities are not particularly stable.